PGIM calls cryptocurrency ‘portfolio kryptonite’ but sees opportunities in broader ecosystem
The latest crypto collapse — in large part driven by poor design of a so-called “stablecoin” — highlights just one of the many reasons why cryptocurrency is a poor choice for long-term investors, according to PGIM, the $1.4 trillion global investment management business of Prudential Financial, Inc. (NYSE: PRU).
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“Three things need to be true for us to add an asset class into a portfolio: the asset needs a clear regulatory framework, it needs to be an effective store of value, and it needs to have a predictable correlation with other asset classes. Cryptocurrency currently meets none of these three criteria.” - David Hunt, CEO, PGIM (Photo: Business Wire)
In PGIM’s latest Megatrends paper, “Cryptocurrency Investing: Powerful Diversifier or Portfolio Kryptonite?” dozens of investment professionals from across PGIM’s fixed income, equity, real estate, private debt and alternatives businesses dissect the most common pro-cryptocurrency arguments and find that direct investment in cryptocurrencies offers little benefit to an institutional investor — while adding considerable volatility and risk.
“As long-term investors and fiduciaries on behalf of our clients, three things need to be true for us to add an asset class into a portfolio: the asset needs a clear regulatory framework, it needs to be an effective store of value, and it needs to have a predictable correlation with other asset classes,” says PGIM CEO David Hunt. “Cryptocurrency currently meets none of these three criteria. It’s much more of a speculation than an investment.”
The PGIM research shows that cryptocurrency is an unreliable portfolio diversifier and an inadequate safe-haven asset or inflation hedge. Recent risk-adjusted returns are not much different than other asset classes but with more frequent and greater drawdowns. Furthermore, the unsettled regulatory backdrop and the significant environmental, social and governance concerns pose significant additional headwinds for long-term investors.
“Cryptocurrency may be a heroic quest to build a viable, decentralized peer-to-peer payment system, but its pricing is based on speculative behavior, rather than a fundamental thesis around its value or utility,” says PGIM Head of Thematic Research Shehriyar Antia. “Furthermore, with little evidence to support it as an effective inflation hedge or safe-haven asset, we see no reason for cryptocurrencies to be a part of institutional portfolios.”